The advantages and disadvantages of Bankruptcy a summary

by admin on 29 September 2007

A person petitions for Bankruptcy when they cannot afford to pay their debts and need to start afresh. Bankruptcy is a formal solution that you can solicit yourself at the court. It’s rare that a creditor will petition the court to make you bankrupt as it costs them money but it can happen.

Typically bankruptcy lasts 12 months and then you are discharged i.e. you are released from the restrictions imposed on you. It can however last much longer – from 5 years up to even a maximum of 15 years. A Bankruptcy Restriction Order is applied beyond the initial 12 months in cases where the bankrupt was dishonest or especially blameworthy for the bankruptcy. Such cases include when the debt was incurred through gambling, fraud or negligence. However misconduct prior to 1 April 2004 will not be taken into account.

The Official Receiver, a public servant that supervises the bankruptcy decides on the Bankruptcy Orders and also the Income Payment Order (IPO). The IPO determines how much of your surplus income (after reasonable living costs have been deducted) you must pay to your creditors. This is typically 50% of surplus income rising up to a maximum of 75%. If you have £50 or less left at the end of the month nothing will be paid back to the creditors. The IPO lasts up to 3 years.The main disadvantages with bankruptcy are:

Your expensive assets such as your house and car can be seized.

Certain debts are not written off. These debts include student loans, child support, overpayment of benefits and court fines.

If an IPO is issued, you will have to pay some of your surplus income towards your debts for three years.

You are not allowed to obtain credit over £500 without disclosing your bankruptcy.

Your career can be damaged and you may even lose your job. This applies only if you belong to certain professions including but not limited to the police, judiciary and certain financial positions. Check your contract of employment and/or contact your HR department if you are unsure.

You are also restricted from being a company director or forming a limited company.

A record of your bankruptcy will remain on your credit file for six years even after you’ve been discharged.

The fact of your bankruptcy, name, address and occupation is published and this has a certain social stigma.

You have to inform the OR of any windfalls such as inheritance or lottery money which are usually taken.

You can be questioned about how you became bankrupt.

Any Bankruptcy Restriction Order will be registered.

The main advantages of bankruptcy are:

The experience usually isn’t as traumatic as it is perceived by the public in general.

While notice of your bankruptcy will be published in the newspaper; it’s usually not read or noticed by most people.

Most Debt is written off and you gain a degree of freedom and a certain peace of mind.

Most cases are automatically discharged from bankruptcy after one year.

You are allowed to keep basic possessions and the tools of your trade if you are self employed

Even though you may be issued with an IPO directing you to pay a proportion of your surplus income, this is only after generous living expenses have been deducted. Your living expenses budget allowed in bankruptcy are far more generous than in an IVA.